- Minneapolis Fed President Neel Kashkari believes there is a nearly 50-50 chance that interest rates will have to rise significantly higher to bring down inflation.
- In an essay published Tuesday, the central bank official said the U.S. could be heading toward a “high-pressure equilibrium” in which inflation remains high and requires “potentially significantly higher” interest rates.
Neel Kashkari, President and CEO of the Federal Reserve Bank of Minneapolis, participates in an interview with Portal in New York City, New York, United States, May 22, 2023.
Mike Segar | Portal
Minneapolis Federal Reserve President Neel Kashkari believes there is a nearly 50-50 chance that interest rates will have to rise significantly higher to bring down inflation.
In an essay published Tuesday, the central bank official said there was a strong case that the U.S. economy was heading toward a “high-pressure equilibrium.” Such a state would require sustained growth with strong consumer spending and “turning the economic flywheel.”
In this case, the inflation rate falls but remains above the Fed’s 2 percent target, presenting a challenge for policymakers.
“This scenario is supported by the fact that most of the disinflationary gains we have observed so far are due to supply-side factors such as workers re-entering the labor market and the unraveling of supply chains, rather than demand dampening by monetary policy,” wrote he wrote a post entitled “The guidelines have been significantly tightened. Is that enough?”
Kashkari noted that interest rate-sensitive areas such as real estate and automobiles have held strong despite the Fed’s tightening, noting: “This dynamic begs the question: How tight is policy now?” If policies were really strict, would we see such robust activity?”
Inflation in the services sector, excluding the cost of renting accommodation, has declined but otherwise remains elevated, raising longer-term concerns.
“Once supply factors have fully recovered, will policy be tight enough to bring services inflation back to target? That may not be the case. In that case, we would have to raise the federal funds rate, possibly significantly higher,” Kashkari said. “Today I put the probability of this scenario at 40 percent.”
Of course, that still means he estimates a 60 percent chance that the Fed will stick to its “soft landing” goal and inflation will return to target without a damaging recession. He cited “the real progress we have made in fighting inflation and the real labor market performance” as factors helping policymakers achieve their goal.
However, the comments come on the same day that the Times of India published an interview with JPMorgan Chase CEO Jamie Dimon in which the bank executive considers the possibility that the Fed may have to raise its key interest rate to 7%. The key interest rate is currently targeted at a range between 5.25% and 5.5%.
Several other Fed officials have recently said they at least expect to keep interest rates elevated for an extended period of time.
For his part, Kashkari has long been considered one of the more dovish members of the Federal Reserve’s Federal Open Market Committee, which sets interest rates, meaning he favors lower interest rates and looser monetary policy.
However, in recent months he has shifted to a more hawkish stance amid concerns about the dynamics that are keeping inflation above target. This year, Kashkari is a voting member of the Federal Reserve’s Federal Open Market Committee, which sets policy. Last week he decided to keep interest rates stable but hinted that another quarter-point hike could be on the way before the end of the year.
While acknowledging the progress made so far and market and consumer expectations that the inflation rate will continue to decline, Kashkari said the neutral interest rate may have increased in the current era, requiring stricter policies.